acct questions

The balance sheet of Werther Company showed the following data about its common stock, par $2: authorized shares, 20,000,000; outstanding shares, 8,600,000; and issued shares 9,400,000. Therefore, the number of treasury stock shares was A) 800,000. B) 8,600,000. C) 0. D) 9,400,000. E) None of the above

A) 800,000 Issued-Treasury = Outstanding Therefore, Treasury= Issued - Outstanding Treasury=9,400,000 - 8,600,000 = 800,000

Which of the following represents the total number of shares a corporation could sell to investors? A) Authorized shares B) Issued shares C) Outstanding shares D) Unissued shares E) None of the above

A) Authorized Shares Authorized Shares: Maximum # of shares allowed to be issued

Which of the following ratios is not considered to be a test of profitability? A) Current ratio. B) Net profit margin. C) Return on assets. D) Earnings per share. E) None of the above

A) Current ratio. (p. 670)

Irish Corporation issued (sold) 5,000 shares of its no par common stock for $35 per share. The bylaws established a stated value of $5 per share. The transaction would increase common stock by A) zero B) $25,000 C) $150,000 D) $175,000 E) None of the above

B) $25,000 Issued Shares × Par Value = Increase in Common Stock 5,000 × 5 = 25,000

3) Which of the following transactions would not create a cash flow? A) Sale of equipment at book value (i.e. no gain or loss). B) Declaration of a cash dividend. C) Purchase of a patent. D) The company purchased some of its own stock from a stockholder. E) All of the above create cash flows.

B) Declaration of a cash dividend. Declaration of a cash dividend means recording a liability (non-cash transaction) ; no cash is exchanged in the transaction.

Which of the following statements is correct? A) When cost of goods sold as a percentage of sales decreases, the gross profit percentage will decrease. B) It is possible that when cost of goods sold in dollars increases, cost of goods sold as a percentage of sales decreases. C) If gross profit percentage is the same for the current and past year, then sales and cost of goods sold in dollars did not change. D) If gross profit percentage increases from one year to the next, then the net income percentage will also increase from one year to the next. E) None of the above

B) It is possible that when cost of goods sold in dollars increases, cost of goods sold as a percentage of sales decreases. COGS % Sales: COGS/Sales Ways for COGS % Sales can decrease: - COGS decreases, no change in Sales - Sales increase, no change in COGS - COGS increase, but Sales also increase more than COGS

If the current ratio is 2 to 1, the receipt of a payment for an account receivable will A) invalidate earnings per share. B) have no effect on the current ratio. C) decrease the current ratio. D) increase the current ratio. E) None of the above

B) have no effect on the current ratio. Payment of A/R is merely the transfer of amounts from A/R to Cash. Therefore, there is no change in current assets.

Finding Financial Information

Balance Sheet: ratios are not found in the balance sheet - When using B/S amounts, the beginning and ending balances are often averaged out to compare against I/S amounts - Ex. Asset turnover ratios Statement of Cash Flows: ratios are not found in the S of CF Income Statement: EPS is the only ratio required in the I/S Statement of Stockholder's Equity: ratios are not found in the S of SE

Tennstedt Company had the following stockholders' equity section: Capital stock, par $10 (40,000 shares issued)=$400,000 Capital in excess of par value= 115,000 Retained earnings, balance January 1, 2019 = 185,000 Revenues earned during 2019= 800,000 Expenses (excluding income tax) incurred during 2019 = 640,000 Cash dividends declared and pain during 2019 = 60,000 Treasury stock (4,000 shares) = 58,000 Income tax rate 30% At what amount per share was the treasury stock purchased? A) $12.88. B) $10.00. C) $14.50. D) $15.00. E) Cannot determine with the information provided

C) $14.50 Treasury Stock= Issued shares of Treasury Stock × Treasury Stock $/share 58,000 = 4,000 × X X = 58,000 / 4,000 X = 14.50

Which of the following statements is not correct? A) Purchasing fixed assets using cash decreases the current ratio. B) Accruing a commission expense will affect the net profit margin ratio. C) Increasing the financial leverage ratio guarantees the net profit margin ratio will increase. D) Purchasing treasury stock results in a decrease in total asset turnover. E) All of the above are correct

C) Increasing the financial leverage ratio guarantees the net profit margin ratio will increase. Financial Leverage is computed by finding the difference between ROE and ROA, an increase in financial leverage could be attributed to changes in other accounts affecting ave. SE and ave. total assets. ROE - ROA: (Net income/ avg. SE) - (Net income/ Avg. Assets)

Which of the following statements is true? A) It is always preferable to compare a company's performance to industry-wide ratios rather than to use a competitor's ratios. B) Ratios compare items from the same financial statement. C) One of the advantages of ratio analysis is that it allows companies of different sizes to be compared. D) Comparing companies from different industries is made possible via ratios E) None of the above

C) One of the advantages of ratio analysis is that it allows companies of different sizes to be compared. Ratio analysis allows companies of different sizes to be compared because it compares company performance relative to its own figures in the financial statement. Comparing competitor ratio is preferable than industry-wide ratios because different companies use different depreciation methods/ inventory costing which may inflate net income. Comparing direct competitors with similar cycles, suppliers and factors makes more sense.

Which of the following is a reason that a corporation would want to issue bonds instead of stock? A) Interest payments cannot be deducted for income tax purposes. B) Current stockholders' ownership is diminished. C) The impact on earnings may be positive. D) There is less cash outflow resulting from bonds. E) None of the above

C) The impact on earnings may be positive. Benefits of Bond Issuance: - Maintain control - Interest expense is tax-deductible - Can increase shareholder value (borrow at a low interest rate and invest in high ROI projects)

Solvency Ratio

Company's ability to pay its long-term obligations Times Interest Earned: (Net Income + interest expense + Income tax expense) / interest expense Cash Coverage Ratio: Cash flows from Operating Act. / Interest paid Debt to equity ratio: total liabilities/ total SE

Profitability Ratio

Compares income with one or more primary activities; focused on net income compared to other amounts in the financial statement. ROE: Net Income / avg. total SE ROA: net income/ avg. total assets Financial Leverage Percentage: ROE - ROA Ex. 45,000/20,000 = 2.25 aka: For every $1 of SE on average, there's $2.25 of net income Net Profit Margin: Net Income/ Net sales revenue Earnings Per Share (EPS): Net income/ weighted avg. # of common shares outstanding Earnings Quality or Quality of Income: Cash flows from operating activities / net income

Market Ratio

Current price per share of a company's stock to the return to shareholders Price/Earnings (P/E) Ratio: Market price per share / earnings per share Dividend Yield Ratio: Dividends per share/ Market price per share

Company's 2019 income statement reported total sales revenue of $1,500,000. The 2018-2019 comparative balance sheets showed that accounts receivable increased by $120,000. The 2019 "cash receipts from customers" would be A) $240,000. B) $1,500,000. C) $1,620,000. D) $1,380,000. E) None of the above

D) $1,380,000. Cash paid= Expense - current liability + current liability - current asset + current asset 1,380,000 = 1,500,000 - 120,000

8) Which of the following statements is not correct? A) The bond principal is the amount due at the maturity date of the bond. B) The stated interest rate is used to determine the cash interest payments. C) The bond principal is used to determine the cash interest payments. D) The market rate of interest is used to determine the cash interest payments. E) All of the above are correct

D) The market rate of interest is used to determine the cash interest payments. The coupon rate not the market rate is used to determine the cash interest payments.

CH. 11

Debt and equity are ways for companies to raise money for corporations. Issuing a stock means selling ownership stockholders for cash. Usually young companies with very high potential will sell equity rather than debt because of its lack of credit history (ex. Tech start-ups selling equity to venture capital funds). When companies want to grow bigger, they often enter an IPO (initial public offering) where they issue shares to the public. When companies become publicly-traded, they are required to release annual and quarterly reports to the public and be open for SOX and GAAP audit. This is not a preferred method though, since most founders do not want to give away ownership. (ex. Private companies like Cargill à 90% owned by the Cargill family of Minnetonka

8) McGee Company gathered the following data to prepare its 2019 statement of cash flows: Net income ............................................$70,000 Depreciation expense.......................$ 10,000 Accounts receivable decrease.... $5,000 Wages payable increase................. $6,000 Amortization of patent......................$2,000 Dividends paid......................................$1,000 Income tax payable decrease...... $4,000 Based only on the above data, the net cash inflow from operating activities during 2019 was: A) $97,000. B) $91,000. C) $88,000. D) $83,000. E) None of the above

E) None of the Above Net Income + Dep Exp + Amort + decr.CA + incr. CL - decr. CL 70+10+2+5+6-4= 89

Which of the following statements about the statement of cash flows is correct? A) Cash dividends paid are classified as cash flows from operating activities B) Cash dividends received on stock investments are classified as cash flows from investing activities. C) A gain on the sale of equipment is classified as a cash inflow from investing activities. D) A company with a net loss on the income statement will always have a net cash outflow from operating activities. E) None of the above

E) None of the above - Cash dividends paid are CF from financing. - Cash dividends received on stock investments are CF from operating. - Gain on sale of equipment is in the net income (which is included in the calculation of CF from operating). - Companies with a net loss will NOT ALWAYS have a net cash outflow from operating activities since net loss can be attributable to other cash payments in investing or financing activities (ex. R&D investment).

The base amount in preparing component percentages for a balance sheet is which of the following? A) Total liabilities. B) Gross profit. C) Net income. D) Total shareholders' equity. E) None of the above

E) None of the above Net Sales (p. 667)

The par value of common stock is the A) average market price of the stock during the period in which it is sold. B) ceiling (maximum) amount above which the stock may not be sold initially. C) minimum price shares of stock may be sold for on the stock market. D) selling price of the stock at the date it was issued by the corporation. E) None of the above

E) None of the above Par value of a common stock: the face value (not related to market price); legal restriction by the charter Stock prices are determined by supply and demand in the market

Asset Turnover Ratio

How efficiently a company uses its assets to generate sales. This ratio divides net sales by average total assets for the period. The resulting number is the dollars of sales produced by each dollar invested in assets. - Asset turnover ratios vary considerably among industries. - For example, a large utility like Ameren has a ratio of 0.32 times. A large grocery chain like Kroger has a ratio of 2.73 times. Thus, in comparing performance among companies based on the asset turnover ratio, you need to consider the ratio within the context of the industry in which a company operates. Total Asset Turnover: Net Sales Revenue / Avg. total assets Fixed asset turnover: Net sales revenue/ avg. net fixed assets Receivable turnover ratio: net credit sales/ Avg.net receivables Inventory Turnover Ratio: Cost of goods sold/ Avg. inventory

Eaton Company issued bonds when the stated rate of interest was 10% and the market rate was 10%. Which of the following statements is INCORRECT? a) the bonds were sold at par (face value) b) annual interest expense will equal the company's annual cash payment for interest c) The face value of the bonds will decrease as cash interest payments are made d) eaton company can deduct the interest paid on the bonds for tax purposes e) all of the above are correct

c) the face value of the bonds will decrease as cash interest payments are made The face value of the bond stays the same.

Liquidity Ratio

company's ability to pay its short-term obligations (only uses CA and CL) Current Ratio: Current Assets/Current Liabilities Quick Ratio: (Cash & Cash Equivalents + Net Accounts Receivable + Marketable Securities)/ Current Liabilities Cash Ratio: Cash & Cash Equivalents / Current Liabilities

A bond for which assets are specifically pledged to guarantee repayment is called: a) a debenture b) a callable bond c) a convertible bond d) a secured bond e) none of the above

d) a secured bond (refer to bond terminology slide)

Which of the following statements is correct? a) a collateral bond has specific assets pledged as collateral to secure it b) an unsecured bond can be paid at the option of the issuer c) a bond trustee is appointed to represent the issuing company if the bond is a secured bond d) the bond indenture specifies the market rate of interest the investors will earn e) None of the above

e) None of the above (refer to bond terminology slide)

Bond Terminology

•Bond principal (face value, par value) -amount the company is required to pay at maturity •Coupon Rate (stated rate, nominal rate) - interest payments stated in annual terms •Convertible bonds -bonds that can be converted to stock •Debenture -unsecured bond •Secured bond - specific assets are pledged as a collateral •Callable bonds -allows the bond issuer to retire the bonds early •Market Interest Rate - investor's rate of return, rate used to compute the present value of a bond •Trading at Par -when coupon rate and market rate are equal •Trading at Premium - coupon > market •Trading at Discount -coupon < market

Direct Method

•Uses I/S account (revenues and expense accounts) +/- corresponding B/S account •Cash received = Revenue + current asset - current asset - use matrix •Cash paid= Expense - current liability + current liability - current asset + current asset - reverse matrix •Cash received from customers: Revenue + A/R - A/R •Cash received from interest/ dividends on investments: Revenue + int or div receivable - int or div receivable •Cash paid to suppliers of inventory: COGS - inventory + inventory - A/P + A/P •Cash paid to suppliers of services (wages, utilities, rent): Other expenses - prepaid expense + prepaid expense - accrued expense + accrued expense •Cash paid for taxes: Income tax expense + prepaid/ deferred income taxes - prepaid/ deferred income taxes + income taxes payable - income taxes payable